For the third year in a row, Louisiana received the worst score in the country on R Street Institute’s Insurance Regulation Report Card, once again edging out second to the worst New York. Both states got an F this year and were the only states to do so.
That being said, R Street vehemently opposes the election of a state’s top insurance regulator, so Louisiana and 10 other states lost points there. Louisiana also came up short for having a concentrated auto market, extremely high auto loss ratio and excess profits in the homeowners line of business. Compared to other states, Louisiana had the lowest five-year average loss ratio in its homeowners line, which R Street takes to mean the rates are too high.
Authored for the ninth year by R.J. Lehmann, the report provides an examination of the state-based system of insurance regulation from the perspective of the free market advocacy group. According to Lehmann, the report demonstrates that, on balance, states do an effective job of encouraging competition and ensuring solvency in insurance markets.
In most U.S. states, (Louisiana not being one of them) Lehmann said, markets for home and auto insurance meet the statutory definitions of competitiveness. Insolvencies are relatively rare, and through the runoff process and guaranty fund protections enacted in nearly every state (Louisiana included), are “generally quite manageable.”
However, some state regulations and state policies have the effect of discouraging capital formation, stifling competition and concentrating risk.
Pure rate regulation remains commonplace, and some degree of rating and underwriting regulation persists in nearly every state, Lehmann observed. He tags this regulation as a “relic of an earlier time,” when nearly all insurance rates and forms were established by industry-owned rating bureaus. With one exception, North Carolina, rate bureaus no longer play a central role in most personal lines markets.
R Street, a public policy think tank in Washington, D.C., based its evaluation mostly on 2019 data. Fundamental to Lehmann’s analysis was how free consumers are to choose insurance products; how free insurers are to provide these products, and how effectively states fulfill their duties of monitoring solvency and fostering competitive private insurance markets.
The evaluation is not intended as a referendum on specific regulators, Lehmann said. An F grade does not mean that a state’s insurance commissioner is inadequate, nor does an A+ endorse those who run the insurance department. After all, significant changes in a state’s score most often would only be possible through action by state legislatures.
Because the factors considered are limited to those that can be quantified, Lehmann said, there are many important considerations the R Street’s report card does not reflect. He cited as an example that there are no good measures of how well states regulate insurance policy forms and the level of competition in local markets for agents and brokers.
R Street gives grades in seven separate grading areas. Altogether, Louisiana garnered 43.4 points out of a possible 100, after getting goose eggs in two categories: politicization (elected commissioner) and concentrated auto market.
In addition to considering whether or not a state’s top insurance regulator is elected in order to assign a politicization grade, R Street also takes into account how subject to politics the removal from office of the insurance regulator is and what level of expertise is required by law for an individual to hold the position. Louisiana scored a minus five for electing its commissioner and zero for each of the other two criteria, so the state and 10 others accrued no points in the politicization area.
Florida led the politicization grading with 10 points. In Florida the insurance commissioner is appointed by a majority of the Financial Services Commission, and only a majority of the commission can act to remove the commissioner. Florida and Texas are among the 10 states that require by statute expertise or experience in the business of insurance as a prerequisite qualification for appointment as insurance commissioner.
Louisiana picked up 8.5 of 15 possible points for fiscal efficiency, which consists of two grading areas: regulatory surplus and tax/fee burden. Louisiana got all of its 8.5 points in the regulatory surplus subcategory. Points were assigned for the degree to which a state does not generate an excess of fee and assessment collections above the amount of funds needed to run its department of insurance.
Oregon scored the worst for regulatory surplus by collecting regulatory fees and assessments amounting to more than 15 times its insurance department’s budget. R Street identified nine states that collected less in fees and assessments in 2019 than they spent on insurance regulation.
In the tax and fee burden subcategory, R Street looked at the total of premium taxes, fees, assessments, fines and penalties collected in each state, expressed as a percentage of premiums written in each state. At 2.8 percent, Louisiana tied with New Mexico for the highest tax and fee burden, and garnered zero points. Delaware and Florida tied for the lowest tax and fee burden, each at 0.2 percent, and each earning 5.0 points out of a possible five points for this subcategory.
Altogether, the 50 states, Puerto Rico and the District of Columbia spent $1.53 billion on insurance regulation in 2019, up from $1.47 billion a year earlier. At the same time, state insurance departments collected more than double that amount, $3.34 billion in regulatory fees and assessments from the insurance industry, R-Street said, citing NAIC data. State insurance departments also collected $190.2 million in fines and penalties and another $1.06 billion of miscellaneous revenue. States separately collected $22.35 billion in insurance premium taxes. Thus of the total $26.94 billion in revenue that states collected from the insurance industry in 2019, 5.7 percent was spent on insurance regulation.
In the area of solvency regulation, Louisiana earned 12.6 points of a possible 20. R Street divides solvency regulation into three grading areas: financial exams, runoffs and capitalization.
In the first metric, R Street considers how frequently each department examines the financial strength of companies domiciled within its borders. Given the guidance that every company should be examined at least once every five years, R Street’s baseline expectation for the sum of those five years is 100 percent. According to R Street, the good news is that 31 of 50 states met that minimum standard. At 108.1 percent, Louisiana earned 2.8 of 10.0 points. States ranged from Utah at 44.5 percent and 0.0 points to Washington State at 268.7 percent and 10.0 points.
In the area of runoffs, Louisiana scored 4.99 points of 5.00. R Street scored states based on the proportion of total 2019 net written premiums that the outstanding runoff liabilities represented. Taken together, runoff liabilities represented 2.2 percent of the average state’s annual net written premium. The results ranged from the 13 states with no liabilities, each earning 5.0 points, to New Hampshire, whose $8.78 billion of runoff liabilities represent 45.9 percent of 2019 net written premium, earning 0.0 points. Louisiana’s runoff liabilities amounted to 0.12 percent of net written premium.
The final test of how well states monitor insurer solvency is capitalization. In this area Louisiana scored 4.8 of a possible 5.0 points. R Street uses the premium-to-surplus ratio to determine each state’s companies’ financial strength, then factors in each company’s market share. Wind pools, joint underwriting authorities and some state workers’ compensation funds were not included as some do not report policyholders’ surplus. The most strongly capitalized market was found in Hawaii which earned all 5.0 points. Texas had by far the most thinly capitalized market, and received 0.0 points.
Considering total points in the solvency regulation category, Washington State had a 19.5 of a possible 20 points. At the bottom of the heap was New Hampshire at 6.7 points.
Auto Insurance Market
Each state’s auto insurance market grade was developed by using the Herfindahl-Hirschman Index measure of market concentration and the state’s five-year average loss ratio.
Three states, Louisiana, Alaska and New York are considered moderately concentrated, and no state was considered highly concentrated. Nonetheless, Louisiana is the only state which got 0.0 out of 10.0 points. The five-year average loss ratio in Louisiana, at 72.5 percent, is greater than the 2019 national average of 67.9 percent. Alaska’s auto market is more concentrated than Louisiana’s, but Alaska scored better because its loss ratio at 64.0 percent beat the national average. The bottom line is that Louisiana has the least competitive automobile insurance market in the country.
For the first time in nine years Michigan did not have the highest loss ratio. At 79.7 percent Colorado beat out Michigan’s 79.6 percent for the worst loss ratio.
Homeowners Insurance Market
As with the automobile market, R Street relied on the market concentration HHI measure and loss ratios as the indicators of a strong homeowners market, giving Louisiana 4.6 points out of 10.0.
Alaska had the least competitive homeowners market while Massachusetts had the most competitive.
Louisiana had the absolute lowest loss ratio at 36.0 percent, for which R-Street awarded a negative 1.7 points. The nationwide five-year average loss ratio was 61.6 percent. There were 13 states with loss ratios greater than the mean, topped by California with a 103.9 percent loss ratio. States lost points for loss ratios that were too great and for loss ratios that were too little.
With R Street’s analysis of residual markets making up 15 percent of the final score, Louisiana scored 11.9 of the 15 possible points. The markets R Street analyzed were the auto, home and workers’ compensation residual markets.
R Street measured the size of residual markets for home and auto insurance using the most recent data from the Property Insurance Plans Service Office (PIPSO) and the Automobile Insurance Plans Service Office (AIPSO). R Street used S&P Global market share data for workers’ compensation state funds.
Residual auto markets currently represent 0.643 percent of the $298.23 billion nationwide market. AIPSO data indicates that residual markets account for less than 0.1 percent of the market in 37 of the 50 states. In Louisiana the residual auto market, the Louisiana Automobile Insurance Plan, accounts for 0.02 percent of the auto market.
The District of Columbia and 30 states operate FAIR plans. Additionally, five states sponsor wind pools; three of the five states operate both FAIR plans and wind pools. Florida and Louisiana sponsor state-run insurance companies that serve both the Coastal and FAIR plan markets.
The Louisiana Citizens Property Insurance Corp. currently has a 1.29 percent share of the Louisiana homeowners market, according to R Street. The largest declines in homeowners residual markets were seen in Louisiana, from 3.5 percent to 1.29 percent, and Texas, from 5.28 percent to 3.25 percent.
In the workers’ comp area, there are four states in which the state is the sole provider of workers’ comp insurance. In an additional 23 states, the residual market is provided by a competitive state fund, which in some states writes more than half of the coverage in the state.
In Louisiana, where LWCC is considered the residual market, the residual market writes 25.8 percent of the workers’ compensation coverage in the state, according to R Street.
Residual market grades ranged from 0.0 points, scored by North Carolina, which has 13.91 percent of its auto business in the residual market and 8.74 percent of its homeowners business in the residual market, and 15 points scored by six states with no significant residual markets.
Louisiana scored 5.0 points of a possible 20 for its rate regulation. The state got 0.0 points for using a prior-approval filing system for auto, home, workers’ comp and medical malpractice rates, but 5.0 points for using a system for commercial rates in which filings are a formality.
R Street found that Wyoming had the most liberal rate-regulation rules. At the other end of the spectrum are six states that use prior approval systems across the board. California was the most restrictive state, R Street said.
After scrutinizing states’ rate regulation, R Street subtracted points from this total, depending on the state’s use of desk drawer rules and restrictions on the use of credit scoring and territorial rating. Louisiana lost points for having desk drawer rules, but does not restrict the use of credit scores and territorial rating, so lost no points there.
In listing state by state developments, R Street noted that in May 2020 Louisiana’s Senate approved SB 477, requiring coverage for COVID-19 business interruption claims. The measure failed to move in the House. In July, Gov. John Bel Edwards signed HB 57, compromise tort reform legislation intended to address some of the cost-drivers in Louisiana’s runaway auto insurance claims environment. During the 2020 First Extraordinary Session, the House Committee on Insurance passed a resolution calling for a 2021 study on whether the insurance commissioner should be appointed.
Vermont, with 66.4 points, broke its six-year streak for having the best insurance regulatory environment in the U.S., with R Street dropping Vermont’s letter grade from A+ to B and its rank from first to 15th. R Street attributed the downgrading of Vermont to generating more fees than necessary to run the regulatory agency, conducting fewer financial examinations, having a less competitive auto market and some loss of underwriting freedom. Arizona, at 74.1 points, moved to the top spot with an A+ from fifth place and an A- in the prior year’s R Street rankings.